Innovation In Spotlight, But Wrong Cast?

Boston Consulting Group shines a klieg light on innovation, but lots of leading companies and industries go unnoticed.

At a time when economists are lamenting a prolonged lapse into slow growth and incremental innovation, Boston Consulting Group is taking a different tack. Based largely on its survey of 1,512 executives at a range of companies worldwide, it concludes that innovation and the "fundamental drivers of growth are stronger than they have ever been in human history."

BCG roughly defines innovation as the ability to create value from new ideas, "whether those ideas are new to the world or new to a particular company." Seventy six percent of the executives the consulting firm surveyed last year ranked innovation as a top three strategic priority, the highest level in the survey's eight-year history, and 24% ranked it as priority No. 1. The executives are putting their money with their mouths are: 69% say their companies will increase their spending on innovation this year, the highest percentage in six years and up from 61% in 2010, the last time BCG conducted its survey.

Companies in emerging markets put even more emphasis on innovation than those in developed markets: 90% of Indian executives and 89% of South American executives, for example, rank innovation as a top three priority, compared with 66% of U.S. executives. Within Europe, executives in Germany are the most bullish on innovation; execs in Italy and Spain the least.

Having just written a column on this subject, arguing that innovation is alive and well despite rampant pessimism, I endorse BCG's optimistic conclusions. However, the firm's choices for the 50 most innovative companies in the world, a ranking it bases on its executive survey and its own analysis of the companies' financial returns, is thin. (Access the full report and ranking here.)

For one thing, 13 of the top 15 companies on its list hail from just two industries: technology and automotive. Now no one's a bigger fan of tech industry innovation than I am, but to posit that the world's top seven innovators come from this one industry suggests that the ranking is more about brand equity -- which companies are top of mind for global executives -- than it is the result of a rigorous, industry-by-industry analysis of who's producing the most compelling products and services.

Apple, for instance, has been No. 1 on the list for the past seven years. That's fine for one, two or three of those years, but seven in a row? The iPhone, iPad and app store constructs were indeed game-changing innovations in their day, but Apple's continued dominance of BCG's innovation list is more a reflection of its world-beating market cap and high profile than its ability to keep producing truly new, category-redefining products.

The top auto industry innovators? Hyundai, Toyota, Ford, Kia and BMW, lined up one after another from Nos. 10 to 14. Yet Toyota continues to be rattled by quality defects and recalls. Meantime, show us the seminal innovations in 2012 from the likes of No. 17 Coca-Cola (caffeine-free Diet Cherry Coke?), No. 18 Dell (a nice consolidation of its market position, but …), No. 20 Wal-Mart (more everyday low prices?) and No. 30 Anheuser-Busch (Bud Light Lime?).

BCG's top 50 ranking is heavily skewed toward just four industries: top heavy on technology and automotive, plus industrial products/processes and consumer/retail. No pharma, no healthcare, no agriculture, no logistics. Only one company on the list (Shell, at No. 35) comes from energy, despite industry-wide breakthroughs for tapping billions of gallons of previously inaccessible oil and gas reserves, portending a shift in the global balance of power. The only company from financial services, an industry on the cutting edge of tech-based innovation, is HSBC (No. 28), in a year in which the bank agreed to pay a record $1.92 billion fine for money laundering. Perhaps its legal defense, resulting in no executive indictments, was considered innovative.

Noting the absence of pharma companies in its ranking, BCG cites the industry's "risk-averse culture" since 2007, when five such companies -- Amgen, Genentech, Johnson & Johnson, Merck and Pfizer -- graced its list. The reason for that caution? "Significantly more commercial and regulatory uncertainty and the rise of more difficult-to-treat chronic diseases," the firm says. BCG calls out Pfizer, which increased its R&D spending from $8.1 billion to $9.1 billion between 2007 and 2011 but reduced that spending as a percentage of revenue.

What about the myriad breakthroughs, many of them tech-based, at healthcare providers such as University of Pittsburgh Medical Center, Beth Israel Deaconess Medical Center and Memorial Sloan-Kettering Cancer Institute? Even if they're not all public, they have a public track record of product and service innovation.

No ranking is perfect and innovation can be a mercurial concept. BCG deserves credit for calling attention to innovation on a global scale. At the inaugural InformationWeek CIO Summit, to be held May 8 in Las Vegas in conjunction with Interop, we'll bring together leading executives to discuss the CIO's and IT organization's critical role in driving innovation. Drop me a note at the address below if you're interested in participating in this important conversation.

I believe companies in emerging markets tend to put more emphasis in innovation simply because they have to. In these markets, innovative solutions are required to solve the problems. If innovation wasn't required, it's likely that another product/company would have already filled the niche.

Rob, could not agree more. Innovation happens at a lower level than "company" - innovative products, business models, projects etc far more interesting. Also, company leaves out so many innovative government entities.

Interesting analysis, I do agree with BCG's opinion that companies in emerging markets put even more emphasis on innovation than those in developed markets, if only because they have less of a "we've always done it this way" mentality.